What is Asset Allocation?

Definition of Asset Allocation

Asset Allocation is the investment strategy, designed to balance reward and risk by appointing the assets of portfolio in accordance with the goal, risk, and investment horizon of an individual.

There are 3 different asset classes-fixed incomes, equity and cash or equivalents. These classes have different levels of risk and return, and the behavior of each class will be different over time.

Explanation

There is no specific formula for making effective decisions regarding asset allocation.

However, most of the finance professionals have the same consensus is asset allocation is one of the most important decision for any investor or organization. In other words, the asset allocation depends on how the investment is allocated in stocks, bonds, and cash or equivalents for desired results.

Asset allocation strategy must be designed in order to produce desired results. It is a key concept of investment management and financial planning. In terms of stock, the considerations for this strategy may be based on market capitalization, industry, style, and location. In terms of fixed income, the considerations are maturity, credit quality, and issuer.